Can I use rental carryover loss to offset capital gain from sale of rental?

[PatriciaV]

Unfortunately, a Passive Loss Carryover from rental activities cannot be used to offset a Capital Gain from the sale of rental property. The tax rates on the two items are different.

However, you may generally deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the rental activity. If you have entered the loss carryover into the Rental Properties of TurboTax, the program will handle the deduction for you when you report the sale of the property.

Additional Info:

• IRS Tax Topic 425 - Passive Activities - Losses and Credits
• Sell Rental Property - Passive Activity Carryover Loss

[reluctant-taxman]

Could you elaborate on this answer.  If we have passive loss carryover because of income exceeding those limits, then sell the rental property in a year where we also have such income, will we be able to finally use that carryover?  If so how? thanks

[Carl]

Carry over passive losses are deductible in the year of sale against other ordinary income *with limits* depending on your AGI. If you report the sale in the Rental & Royalty Income (SCH E) section of the program, then the program will automatically take care of this stuff for you. Any excess losses that are not allowed because *maybe* your AGI is to high, are carried over to the next year.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2018". Select it. After you select the "I sold or otherwise disposed of this property in 2018" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[tagteam]

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@reluctant-taxman wrote:

If we have passive loss carryover because of income exceeding those limits, then sell the rental property in a year where we also have such income, will we be able to finally use that carryover?  

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In the year you dispose of your rental property to an unrelated third party in a fully taxable transaction, all suspended passive activity losses are released and available to offset other income. 

In the above scenario, your AGI is irrelevant and it is possible to have an NOL based upon the release of the suspended losses.

[friendlyguy1]

"In the year you dispose of your rental property to an unrelated third party in a fully taxable transaction"

=> What happens when you sell the property in your personal name to an LLC for better liability protection - but you are a member of that LLC ?

=> Can my passive activity losses be released in that case too ?

Any other aspect to consider when selling to a related LLC i.e. of which I'm a member ?

[tagteam]

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@friendlyguy1 wrote:

=> What happens when you sell the property in your personal name to an LLC for better liability protection - but you are a member of that LLC ?

=> Can my passive activity losses be released in that case too ?

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No, absolutely not since that would not actually be considered a "sale" (more on the order of a capital contribution) and, even if it were considered a sale, an entity that is controlled by you (ownership of more than 50%) would be considered a related party.

[melanie2301011]

Hi there - this is an old thread but wondering if someone can answer.  I sold my previous residence which I  rented for the past 1.5 years (lived in it prior to that).  I have carryover loss from the rental. 

1. What happens to the carryover loss?  Someone mentioned in a thread I could use it offset 'other income' but not sure what that means (ie: 'ordinary income'?)

2. Do I pay depreciation recapture on the depreciation I took while it was rented? I thought so but was told from someone this would not apply in my situation since I sold a prior residence.  On a side note, the depreciation is roughly the same amount as my NOL (so I am wondering, if these would just cancel out somehow)

thanks for any feedback.

[melanie2301011]

sorry, forgot to add that I do qualify for $500K capital gains exclusions since I lived in the home for 2 of the last 5-yrs. 

[ThomasM125]

The carryover loss will be deductible in the year of sale against ordinary income you have, such as wages. Any depreciation you were entitled to will be taxable as ordinary income, with a cap at 25%, to the extent you have a gain on the sale. Assuming you lived in the house as your main residence for two of the previous five years, the balance of your gain will not be taxable up to the $500,000 limit if you are filing married-joint.